Thursday, 21 August 2014

In May last year, I did some back of the envelope numbers on the role of foreign buyers in driving the London property market.On the basis of a very quick calculation I concluded that "domestic sources of demand (including from first time buyers) are much
more important in understanding the overall London property market than a
small number of rich foreigners."

I haven't revisted these numbers, but was interested to read the following in Thomas Piketty's Capital (p463-4):

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The rich countries are not about to be taken over by the poor countries, which would have to get much richer to do anything of the kind, and that will take many more decades.

What then, is the source of this fear, this feeling of dispossession, which is partly irrational? Part of the reason is no doubt the universal tendency to look elsewhere for the source of domestic difficulties. For example, many people in France believe that rich foriegn buyers are responsible for the skyrocketing price of Paris real state. When one looks closely at who is buying what type of apartment , however, one finds that the increase in teh number of foreign (or foreign-resident) buyers can explain barely 3 percent of the price increase. In other words, 97 percent of today's very high real estate prices are duce to the fact that there are enough French buyers residing in France who are prosperous enough to pay such large amounts for property.
--

This is certainly in line with my priors but I'd love to see similar calculations for London.

[The source for the precise 3% figure is a PhD thesis that proved to be beyond my (miserable) French - I'm not aware of anything similar for London].

To an economist, such officially defined targets imply that governments see significant externalities from broadband provision, and that if left to markets, too many households would be left in the slow lane. However, putting a number on these spillover benefits is very hard. In turn, that leaves it unclear whether publicly subsidized improvements in broadband infrastructure really are socially desirable.

I’ve just released this research, in which my co-authors Pantelis Koutroumpis and Tommaso Valletti and I try to quantify broadband’s benefits to households. We were particularly interested in the benefit users derive from internet usage above and beyond what they pay to their internet service provider (ISP). Measuring this ‘consumer surplus’, however, is difficult because we can’t directly observe what people would be willing to pay.

To get around this, we argue that it is possible to indirectly infer the consumer surplus from property prices. In the UK every property is connected to one and only one internet delivery point - the local exchange (LE). Actual broadband speed critically depends on the distance of a property to its LE and the technology of the LE: fast connections need a property close to an LE, and for the LE to have fast hardware. All else equal, properties at such favourable locations will be more attractive and, as a result, will sell at higher prices. The value of a decent internet connection can therefore be inferred from a comparison of property prices across locations, controlling for other factors.

Econometrically, there are two challenges with this approach. Firstly, there will always be some factors that shift property values and are unobservable in the data. Secondly, neighbourhood-level changes can lead ISPs to upgrade their LEs and at the same time cause house prices to increase. Our identification strategy addresses both concerns. Our most restrictive empirical models identify the broadband premium from changes in broadband speed and house prices over time and across LE boundaries. We compare properties that are located within a couple of hundred meters, but within different LE catchment areas – see figure. Within such a small range it is unlikely that distinct changes in speed that result from different upgrades in the two different LEs will be confounded with other changes in the neighbourhood.

Using this strategy we identify the causal effect of broadband speed on property prices, from about 1m property transactions between 1995 and 2010, and three LE upgrade waves covering around 4000 exchanges. We find that property prices increase on average by about 3 per cent when internet speed doubles. Importantly, there are diminishing returns to speed. While the increase in value is even greater when starting from slow internet connections, an increase in nominal speed from 8 to 24 megabits per second raises the property value by no more than 1%.

Another main finding is that the consumer surplus differs substantially across regions. It is highest in high income areas that are highly urbanized. As an example, the consumer surplus in London is almost twice as high as in any other of the English regions, reflecting very high usage in the capital city for both work and personal reasons.

We use these estimates to compute the aggregate consumer surplus from taking all UK households on broadband to the 30 mbit/s target envisioned by the EC. Comparing the results to engineering cost estimates, we find that urban areas pass the cost benefit test by a large margin. The opposite is true for rural areas. This is partially because the benefits in these areas are lowest, and partially because the costs are highest.

These results suggest that in rural areas it makes more sense for governments to adopt less expensive fixed and mobile technologies that deliver decent and reliable speed. For urban areas, super-fast broadband is an economically viable technology. An equity issue arises, however, if all taxpayers pay for a subsidized rollout, but landlords in the targeted areas accumulate a large fraction of the benefits. A levy on landlords could help promoting the rollout of fibre while at the same time saving taxpayers’ money and reducing inequalities.

Friday, 1 August 2014

One of the 'joys' of putting together a serious evidence based analysis of the effects of our planning system is to have planners turn round and dismiss the results because the analysis has not evaluated the benefits of planning. This is especially true since one of us was the first – and still one of the very few – to attempt rigorously to evaluate the net effects of restrictions on land supply; and found them to be substantial and negative in terms of their welfare effects.

The issue is in reality that very powerful and dirigiste planning policies are introduced with no attempt to analyse the value of either the benefits they might generate or the costs they impose. Because it is absurd to try to claim that planning policies do not have any costs it is surely better to have a reasonable measure of what those costs are so when we evaluate benefits – whether identified quantitatively or qualitatively – we can set the benefits against their costs. Otherwise it is rather like the ‘ladies’ menu in a posh restaurant. Great claims may be made for the dishes but it is not possible to make an informed choice of what to eat unless you know that the foie gras costs £45 while the excellent artichokes are a snip for a fiver.

Just such a policy is Town Centre First (TCF). The strict version was introduced almost on a whim in 1996 with the aim of concentrating new retail development on particular sites in central locations. One of the outcomes of this policy is highly visible: small local stores – such as Tesco Expresses or Sainsbury Locals – have mushroomed in locales that are deemed to be 'town centres' according to planners. At the same time, very few large scale supermarkets – built after 1996 – can be found out-of-town, where English households increasingly decide to live (ironically, in part this suburbanization is driven by planning restrictions in urban areas that make housing in those places increasingly unaffordable). This is because of the so called ‘sequential test’ that was designed to rule out all possible sites before allowing an out-of-town site even to be considered. The ultimate outcome of this has been that it became all but impossible to develop large format out-of-town stores in England after 1996.

There are a number of obvious adverse consequences of forcing retailing into small and often awkward sites in ‘town centres’: these locations will be less convenient for suburban shoppers (an ever growing share of the population) and the smaller stores will, compared to large format out-of-town stores, be able to offer less variety, at higher prices.

Another potential cost of TCF policy could be that it lowers efficiency by forcing stores onto more awkward and difficult to manage sites in intrinsically less productive locations. A major reason for their intrinsic lower productivity is likely to be the difficulty of supplying them efficiently. Supply depots remain located with respect to the motorway system and local planners and politicians (rather than retailers) choosing store sites in ‘town centres’ is not a recipe for efficiency. It is issues such as these that we explore in an article that is forthcoming in the Journal of Economic Geography.

Using unique store-specific data from one of the four largest supermarket chains in the UK and exploiting useful variation in TCF policies between England and Scotland and Northern Ireland – where TCF policies were introduced later and much less rigorously, especially in Northern Ireland - we identify the loss of output imposed by the implementation of TCF policy in England. Also we have data on how planning restrictiveness has varied across English Local Authorities (LAs) since 1979.

Our findings are staggering. The first is that the most restrictive LAs more or less plan supermarkets away from the communities they serve. A one standard deviation increase in the restrictiveness of a LA (which would move the LA from about average to be just in the top 15% in terms of restrictiveness) reduces the probability of their being a supermarket in it by 26%. Since more restrictive LAs also restrict the size of stores, the same increase in restrictiveness reduces the chain’s floor area in the more restrictive LA by 42%. The resulting scarcity of supermarket space does mean more sales per sq ft of floor area so the chains’ sales are reduced by ‘only’ 32% for a one SD increase in local planning restrictiveness.

Turning to the direct impact of TCF policy, according to our most conservative estimate, the implementation of strict TCF policy in 1996, combined with the initial effect of tightening controls on out-of-town stores in 1988, caused a total loss of sales of some 32%. This is the total loss of output, all else controlled for, observed in an English store opened after 1996 compared to stores that opened up prior to 1988 (when retailers in England were still pretty free to choose optimal locations) - equivalent to more than a lost decade of growth in retail output.

Our analysis suggests that the gross cost of constraining retail to sites and locations chosen by planners and local politicians rather than by retailers and shoppers, has a staggering price tag attached to it, up there with the £45 foie gras. Whether the price tag is too high depends of course on the benefits forcing retail to ‘town centres’ may deliver. The declared aim of TCF has been to make cities more ‘sustainable’ and retain access to shops for those without cars. To deliver any final verdict on TCF, these alleged benefits would also need to be rigorously quantified.

As it is they are no more than claims because there is no evidence they exist. This is what we are trying to do in an ongoing project. Our still provisional findings do not suggest that TCF policies ‘deliver the goods’. What we find is that, since TCF was strictly imposed in England, adding new stores in a local shopping area reduces distances travelled for shopping in both England and Scotland, but it has done so much more in Scotland. This is not really surprising. Whereas in Scotland retailers built stores where households increasingly live and want to shop (in suburban and ‘out-of-town’ locations), in England planners and local politicians have deliberately made this much more difficult; new stores are disproportionately on sites that are less convenient for shoppers. To be sure; some shoppers will be better off. One of us does not have a car and lives near a ‘town centre’ high street. He appreciates the additional stores. However, not many households own no car and live near ‘town centres’. So, while TCF may be the equivalent of a nice meal for a few, for most of us it is probably an empty plate: or to mix our fables - emperor’s clothes. Either way it seems to have a very high price tag attached to it.

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